Cyclopharm Cooking With Technegas

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Cyclopharm remains a minnow on the market – it is capitalised at just $34 million, and liquidity is poor, but it recorded an impressive turnaround in 2014, and shrugged off at least one issue that had been a major distraction to the market.

The 2014 financial year (calendar year) was an exciting one for Australian nuclear medicine company Cyclopharm Limited (CYC) – this time, for mostly the right reasons.

Cyclopharm surged back to profitability, reporting record net profit of $4.1 million – although that included a $2.65 million legal settlement – on the back of record total sales of $12.1 million.

Cyclopharm makes radio-pharmaceuticals, which are used in highly specialised scanning equipment to detect and track diseases. The company’s target customers are nuclear medicine departments in hospitals and clinics. The flagship product is Technegas, the Cyclopharm’s patented nuclear medicine technology for imaging lung disease. Cyclopharm also makes a range of molecular imaging/positron emission tomography (PET) radio-pharmaceuticals, which are used in cancer, brain and cardiac imaging.

The company’s proprietary Technegas technology is a structured ultra-fine dispersion of radioactive-labeled carbon in gaseous form, which is inhaled by the patient through a breathing apparatus, and then allows multiple views and tomography imaging under a gamma or single photon emission computed tomography (SPECT) camera, for diagnostic purposes.

The PET radio-pharmaceuticals target specific tissues and organs, concentrate on those places, and the attached radio-isotope emits radiation, which is then detected by a PET camera. These imaging techniques help physicians improve their ability to detect and determine the location, extent and stage of cancer, as well as neurological disorders and cardiac disease. By improving diagnosis, PET scans help physicians to identify better courses of treatment, as well as assessing whether treatment is effective or should be changed.

Cyclopharm also has a joint venture with Alfred Health Solutions and Macquarie University Hospital, known as Macquarie Medical Imaging, which provides all imaging services on-site at the hospital. The company sees the joint venture as a rare strategic opportunity to provide a fully aligned and integrated diagnostic, therapeutic and research platform. MMI offers a range of diagnostic radiology, interventional radiology, nuclear medicine and molecular imaging services for inpatient and outpatients.

These operations delivered cash flow of $4.5 million for the year, with $4.05 million of that coming from Technegas. Sales of Technegas generators and the consumable product, Patient Administration Sets (PAS), rose 10% in 2014, to $11.5 million. Cyclopharm says Technegas has established itself as an essential tool for diagnosing pulmonary embolism in hundreds of hospitals and clinics worldwide and there is great potential to expand its use to other diseases.

2014 saw particularly strong growth in international sales of Technegas, with the technology sold in 55 countries, with Canada the largest market. There was also progress in expanding the use of Technegas for additional diagnostic purposes as well as into new markets. During the year Cyclopharm also commenced trials in China for the use of Technegas in the diagnosis and treatment of chronic obstructive pulmonary disease (COPD): these trials are expected to conclude in the last quarter of 2015. Expanding the use of Technegas from Pulmonary Embolism (PE) diagnosis to COPD would significantly expand the technology’s market size. Cyclopharm is also seeking regulatory approval to begin selling Technegas in Russia.

Cyclopharm also took important steps in 2014 to help expedite FDA approval to sell Technegas in the United States. FDA clinical trials are expected to be completed in 2016. The company also secured patents for its innovative Ultralute technology for extending the life of certain radio-pharmaceuticals: sales for this product are expected to begin in late 2015. This technology boosts the useful life of isotopes used in nuclear medicine studies – a highly expensive recurring purchase – by up to 50%, and the company says global interest in the product is increasing. Cyclopharm considers Ultralute a “platform’ technology that will have additional applications.

The $2.65 million legal settlement that formed a big chunk of the company’s net profit was a particularly gratifying sight for shareholders, because it represents the last of the long-running legal action against PETNET Australia, a subsidiary of the Australian Nuclear Science & Technology Organisation (ANSTO). PETNET Australia and Cyclopharm first locked horns in 2011, when Cyclopharm went into direct competition with PETNET in a multi-million dollar tender to service hospitals in New South Wales.

Cyclopharm’s subsidiary Cyclopet marketed the nuclear pharmaceutical F-18 fluoro-deoxy-glucose (FDG), made at its facility at Lucas Heights, New South Wales, for use in positron emission tomography (PET) by doctors, to improve diagnosis (mainly of cancers) by enabling high-quality imaging of both function and disease states in specific tissues and organs. PETNET’s bid beat Cyclopharm’s, but the latter complained to the Productivity Commission that the government-owned ANSTO had failed to comply with rules on competitive neutrality, and that the prices included in the PETNET tender didn't reflect the true costs – meaning that its profits were not commercially acceptable.

The Productivity Commission's Competitive Neutrality Complaints Office made two key findings in favour of Cyclopharm, ruling that PETNET Australia was bidding in what amounted to an uncommercial fashion by not pricing its products to ensure a return on investment over its 15-year payback period.

The stoush is now behind Cyclopharm: most of the settlement was applied to retire the group’s outstanding bank loan of $1.5 million. With that debt fully repaid, Cyclopharm reported net cash of $3.27 million on the balance sheet at year-end.

(The Cyclopet cyclotron, in Sydney, ceased operations in April 2014, and its medium to long-term status is “under evaluation.” However, the company has begun its reinstatement, which will be fully funded by insurance.)

That is not to say that the company is no longer susceptible to extra-curricular distractions. Just this week, at the annual general meeting, Cyclopharm’s largest shareholder, private equity group CVC (which holds 19.4%), voted against the company’s remuneration report, helping to deliver a “first strike” rejection of the report. The other major holders, UK-based investors Lloyds & Casanova Investment Partners (18.4%), Barings Acceptance (18.4%) and Chemical Trustee (13.95%) were apparently not at the meeting.

There is also the annoying matter of chairman Vanda Gould’s running battle with the Australian Taxation Office’s Project Wickenby, which saw the ATO allege tax and money-laundering charges: these were withdrawn last year by the Commonwealth Director of Prosecutions, only for a scathing Federal Court judgment in December threaten fresh charges against Mr. Gould, leading to his resignation as chairman of CVC Ltd.

But the point appears to be that at long last, Cyclopharm shareholders can concentrate solely on the business – which appears to be ticking along quite nicely. Indeed, amid the excitement of the remuneration report being voted down, CYC shares surged 23% on Tuesday as the company indicated that its balance sheet strength would allow it to fund ongoing R&D and new growth opportunities and possibly return cash to shareholders, in some form.

Cyclopharm remains a minnow on the market – it is capitalised at just $34 million, and liquidity is poor, but it recorded an impressive turnaround in 2014, and shrugged off at least one issue that had been a major distraction to the market. It will now be judged on financial metrics, but it has at least put itself on a sound footing for growth, with far more clear blue sky ahead of it than at any time in the last four years.

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au